Chief executives look at management buyouts

By Ben Bland

12:01AM GMT 17 Mar 2008

Like any other salesmen, corporate financiers are always keen to talk up their own book. At the end of last year, with the stock market showing no signs of recovery, Aim bankers were keen to pump up suggestions that 2008 would be a year of mergers and acquisitions.

While investors' shrinking risk appetite meant that there would be significantly fewer new flotations, they insisted that companies would take advantage of depressed share prices to snap up their competitors in a wave of consolidation.

As the first quarter comes to a close, there are few signs that this analysis by the City's ever-optimistic deal-doers was anything more than wishful thinking.

However, there is hope for the fee-hungry financiers yet, as the pitiful performance of Aim stocks this year seems to have encouraged a number of chief executives to push for management buyouts (MBOs) instead.

Behind closed doors, frustrated executives often brag that "if the market doesn't start valuing my company correctly soon, I'll just buy it back". Now, an increasing number of management teams are putting their money where their mouth is.

Jon Smith, chief executive of First Artist Corporation, may have ruled out a buyout for now (see Market Profile below). But others are forging ahead with what can be a fraught exercise.

Among others, Charles Denton of e-commerce group ArgentVive, Mark Smith of marketing firm TMN and Simon Yaxley of pharmaceutical technology business Premier Research are all publicly pursuing buyouts.

The likes of Peter Shea at Daniel Stewart Securities, Tim Linacre at Panmure Gordon, Allen Timpany of Vanco and Karl Watkin, who just left D1 Oils, are all rumoured to be looking into possible management takeovers.

In the small-cap stockbroking world, in particular, Andrew Monk of Blue Oar Securities thinks we are much more likely to see MBOs than mergers and acquisitions. "I'm pretty dubious about the M&A argument," he said. "You don't need to acquire when you can grow organically. Small brokers tend to sit on a lot of cash but I don't think you're likely to see consolidation - MBOs are much more likely."

However, while news of a possible MBO will usually boost a company's share price in the short term, in-house takeovers often lead to considerable friction with investors. Especially as canny chief executives usually try to take advantage of an ailing stock price to get away with a low-ball takeover offer.

"Many Aim executives mismanage investors' expectations and then become disaffected with the City, so the City becomes disaffected with them," explained Graham Neale, head of equities at stockbrokers Killik & Co. "Then, as soon as they say they're looking at an MBO, it's obvious that they're not interested in serving the interests of their smaller shareholders any more.

"MBOs often ring alarm bells with investors and the City doesn't forget if you try to take advantage of a cheap share price. It's difficult for these executives to regain the trust of investors."

Another serious problem at many Aim companies is the lack of decent non-executive directors - whose job it is to defend the rights of minority shareholders.

"A lot of Aim companies don't have enough non-execs and the quality of some of these people is frankly laughable," noted one rather scathing Aim investor. "Minority investors - from City fund managers to mom-and-pop shareholders - are reliant on these supposedly independent non-execs to fight their ground in an MBO situation. But they're usually happy to let the executive directors, who recruited them in the first place, walk all over them.

MARKET PROFILE

JON SMITH

CHIEF EXECUTIVE, FIRST ARTIST CORPORATION

Given that the football transfer market is stronger than ever, you might expect that First Artist Corporation, which is the only publicly listed football agent in London, would be in vogue with investors.

First Artist has a pretty good pedigree, acting for an array of leading footballers, including Italian Marco Materazzi, Arsenal's Belorussian star Alexander Hleb and Newcastle United hardman Joey Barton.

But the grim reality is that, as with other small-cap stocks, most institutional investors do not want to go anywhere near it in the current market.

"When we see fund managers, we feel like we're wasting our time," explains Jon Smith, First Artist's founder and chief executive. "They just don't want to buy micro-caps. We've done everything that we said we would over the past three years and investors just say 'come back in a year's time'. But that's a fob-off."

Mr Smith is not the first Aim chief executive to complain about fund managers' eagerness to "de-risk" their portfolios by steering clear of small-cap companies. And, as institutional investors continue to sell off their small-cap shareholdings, he certainly won't be the last.

Like other executives who feel that their shares are not being properly valued by the market, Mr Smith has looked into the possibility of a management buyout. But it's not something that's on the cards, for now at least.

"I'm 55 and do I really want to put my hand in my pocket again to put money into the business?" he says. "In addition, would I want a venture capitalist sitting on top me? I don't think so."

Although the football business only accounts for 20pc of First Artist's revenues, it is without a doubt the most high-profile and time-consuming part of the group.

And, helped by ever-rising player wages, it is performing rather well.

First Artist hit all its targets during the January transfer window, when it helped broker the deals that brought Felipe Caicedo from FC Basel to Manchester City and Jean-Alain Boumsong from Juventus to Lyon.

However, as Mr Smith puts it, "these deals don't happen overnight".

He adds: "I spend a disproportionate amount of my time on football and I want to cut back because we've got a business with a turnover of £60m that we need to run as well."

The rest of First Artist's divisions are not quite as sexy as football, although its theatre marketing and signage businesses and corporate sponsorship arm are still performing pretty well.

In any case, Mr Smith insists that his close links with the rich and famous of the football world are very beneficial to other parts of the business.

"We have access to all the owners of the Premier League clubs and it's good to have them in your mobile phone," he adds.